Abstract

Recent research work has shown that inflation rate is asymmetric and
it is also well known that asymmetry is a non-linear phenomenon. In order to
better understand this non-linearity in inflation of Pakistan, we investigate the
possible presence of Smooth Transition Autoregressive (STAR) non-linearity in
inflation series. The study finds that month on month inflation series for Pakistan
possesses both logistic and exponential STAR type non-linearity. Exponential
Smooth transition function was proven to be more relevant on the basis of Dijk
et al. (2000). Therefore, we develop ESTAR model in this paper which
outperforms its linear rivals in forecasting.

Meese, R. and K. Rogoff (1983), Empirical exchange rate models of the seventies: Do they fit out of sample? Journal of international Economics, Volume 14, pp. 3-24. Available at http://ideas.repec.org/a/eee/inecon/v14y1983i1- 2p3-24.html